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Get Your Retaliation in First: The importance of clear and wide release clauses in Compromise Agreements

A claim against a firm of solicitors for damages in negligence valued at more than £70 million was declared to have been compromised by a settlement agreement entered into years earlier. However the facts that were said to constitute negligence were unknown at the time of the settlement agreement.

Case background

Forsters solicitors initially acted for RGP the director of a company (I) which was involved in the acquisition of an oil exploration opportunity in Russia. As part of the opportunity, I was to acquire 100% of the shares in a Russian company, YBI from another company IGL via a share purchase agreement. Forsters rendered an invoice for their services on this project over three years between 2007 and 2010. I wished to change solicitors .Forsters insisted on a personal guarantee from the director RGP for the outstanding fees. This was given in July 2010. Two years later in 2012 Forsters issued proceedings for their fees against RGP under the guarantee. After negotiations a three way settlement agreement was entered into between Forsters, the director RGP and the company I. The Settlement Agreement was executed in relation to an amount being paid which was said to be in full and final settlement of “any claim …potential claim…whether known or unknown, suspected or unsuspected, however and whenever arising…whether or not such claims are within the contemplation of the parties at the time of this Agreement”.

In 2013 the company I found that there had never been a transfer of YBI shares from IGL to I in Russian law and that it did not own YBL. I was put into liquidation.

In 2015 the Claimant KMR pursued a claim for damages in excess of £70 million against Forsters alleging negligence in the transaction. KMR said that it had acquired the claims of I from the liquidators .KMR sought summary judgment on the grounds that: 1. the Settlement Agreement was not to be construed so as to release the Defendant from the claim, and 2. that the Settlement Agreement was void due to a fundamental common mistake. Forsters argued that the negligence claim fell within the wide definition in the Settlement Agreement and so had been compromised.

The issue of construction was determined as a preliminary issue and the court found that the wording of the Settlement Agreement was sufficiently wide as to result in the claim being “caught” by the definition in the Settlement Agreement and therefore had been compromised even though the facts giving rise to the claim were not known at the time of entering into the Settlement Agreement .

The Importance of Clear Drafting

Despite the Judge, Sir Bernard Eder, reiterating that a court “in the absence of clear language …will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware” given the very wide definition of claims which were agreed to be compromised in the three way Settlement Agreement on payment of the settlement sum in this case he found that the negligence claim had been compromised. KMR tried to rely on BCCI v Ali in which a former employee of the Bank argued that a claim with a cause of action not recognised in law at the time of a compromise agreement could be made despite a compromise agreement having been entered into .The judge distinguished the BCCI case from this one on the grounds that the BCCI claim was deemed to be an “unknown unknown”, and could not have been regarded as a possibility by the involved parties before settlement as it was not recognised in law. In this case none of the parties to the Settlement Agreement could have believed that a claim for negligence and/or breach of contract was impossible. Ultimately the judge considered what the parties could reasonably be taken to have intended based on the wording of the release by examining the background and context of the Agreement. In the event of a dispute over fees arising and being compromised, clear wording releasing the professional from liability for negligence claims known or unknown may well be found to mean exactly what they say and to stop claims in negligence before they get off the ground.

Compare jurisdictions: Arbitration

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